PMGT5871 Chap.4 Cost Estimates, Contingency and Budgets
Cost Estimates, Contingency and Budgets
Cost planning produces three sub-plans: the project cost estimate, the time-phased budget and the cash-flow plan. This chapter defines direct cost, indirect cost, contingency and management reserve, compares the direct-cost estimating techniques taught in Week 4, and shows how indirect cost and contingency are set as amounts, percentages, project-type allowances or risk-based figures.
A worked depot upgrade rolls direct cost up through the WBS and then spreads it week by week into a time-phased budget with a cumulative check. Cost questions reward clear working. Most marks come from stating the basis of each figure, adding through the WBS without dropping a branch, and applying the time-phasing rules correctly.
The Week 4 tutorial asks groups to develop a project cost estimate and a time-phased budget for the first case study, which is the same sequence this chapter follows, and the result becomes the budget section of the group plan.
What this chapter covers
- 01
Project cost estimate, time-phased budget and cash flow
- 02
Direct cost compared with indirect cost
- 03
Contingency, known unknowns and management reserve
- 04
Direct-cost estimating techniques
- 05
Setting indirect cost and contingency
- 06
Cost baseline, budget at completion and bid price
- 07
The five steps of a time-phased budget
Worked example · free
Calculating a project cost estimate
- 1Add the branches: $19,500 + $160,000 + $10,500 = $190,000 direct cost.
- 1Indirect cost: 12% of $190,000 = $22,800.
- 1Contingency: 10% of $190,000 = $19,000.
- 1Estimate: $190,000 + $22,800 + $19,000 = $231,800.
Key terms
- Direct cost
- What it costs to carry out the WBS work itself, such as labour, goods, services, materials and facilities.
- Indirect cost
- A cost incurred by all projects that cannot be traced to a single project or work package, such as rent or licences.
- Management reserve
- Funds held for unknown unknowns, separate from the project contingency for known unknowns.
- Parametric estimate
- A cost found by multiplying a unit value by the number of units.
- Bottom-up estimate
- A cost built by estimating the lowest WBS items and adding them up through each level.
Cost Estimates, Contingency and Budgets FAQ
What are the three cost sub-plans?
The project cost estimate states the total cost, the time-phased budget spreads that cost over the periods in which work occurs so it can be monitored and controlled, and the cash-flow plan shows when access to funds will be needed.
How is contingency usually set?
Week 4 lists an arbitrary amount, an arbitrary percentage, a percentage by project type such as 10% for construction and 30% for software development, or a risk-based figure. Contingency is adjusted as risk levels change during the project.
How are goods treated in a time-phased budget?
Goods such as materials or equipment are lumped into the period in which they are expected to be received, whereas activities that span several periods have their cost spread proportionally across those periods.
What is the difference between contingency and management reserve?
Project contingency covers known unknowns within the estimate, such as activities taking longer than planned. Management reserve covers unknown unknowns. Neither is meant for new scope, which must go through change control and be estimated separately.
What does three-point estimating do?
It averages an optimistic, a most likely and a pessimistic estimate, giving extra weight to the most likely value. This is the PERT idea named in the Week 4 materials, and it gives a more realistic figure than a single guess when costs or durations are uncertain.
What is the difference between a time-phased budget and a cash-flow plan?
The time-phased budget allocates direct cost to the periods in which the work happens, so actual spending can be compared with the plan. The cash-flow plan shows when funds must actually be available, which can differ when suppliers invoice before or after delivery.
Exam move
Build a one-page cost table for a project of your own: three or four WBS branches with labour and goods, a direct-cost total, an indirect allowance and a contingency with its basis stated. Then phase it over six periods, applying the spreading and goods rules, and check that the cumulative line ends at the direct-cost total.
For the techniques, make a card for each with its data source, because exam options usually turn on whether the estimate comes from a past project, a unit rate, a supplier quote or an expert. Finally, explain in two sentences why contingency belongs in the estimate and not inside activity durations.
A final habit worth building: after every cost calculation, reread the question and confirm whether the percentage applies to direct cost or to some other base, because that one word changes the answer.
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